Have European stocks become more volatile? An empirical investigation of idiosyncratic and market risk in the Euro area

Colm Kearney, Valerio Poti

Research output: Contribution to journalArticleResearchpeer-review

39 Citations (Scopus)

Abstract

We examine the dynamics of idiosyncratic risk, market risk and return correlations in European equity markets using weekly observations from 3515 stocks listed in the 12 euro area stock markets over the period 1974-2004. Similarly to Campbell et al. (2001), we find a rise in idiosyncratic volatility, implying that it now takes more stocks to diversify away idiosyncratic risk. Contrary to the US, however, market risk is trended upwards in Europe and correlations are not trended downwards. Both the volatility and correlation measures are pro-cyclical, and they rise during times of low market returns. Market and average idiosyncratic volatility jointly predict market wide returns, and the latter impact upon both market and idiosyncratic volatility. This has asset pricing and risk management implications.
Original languageEnglish
Pages (from-to)419 - 444
Number of pages26
JournalEuropean Financial Management
Volume14
Issue number3
DOIs
Publication statusPublished - 2008
Externally publishedYes

Cite this